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The Nation’s First Credit Report

As anyone with a pulse probably knows, the United States government is pretty badly in debt. I did a few searches to try to find the total, but that was difficult. It appears that most “debt-clock” sites show the nation in the hole by more than $14,000,000,000,000…14 trillion dollars.

But then there’s this thing called “unfunded liabilities”. What’s the difference between those and traditional debt? As best I can tell, a “debt” is money you owe for something you’ve purchased. You borrowed to buy a car, or a house, or a boat. So you have the asset, but you still owe money for it…that’s debt. But let’s say you’ve committed to buying a house, even though you don’t have the money to pay for it. That’s an unfunded liability. Once you buy the house and get a physical loan for it, the unfunded liability becomes actual debt.

Like I said, the U.S. government’s debt is more than $14 trillion (and it’s gone up a couple million dollars in the time it’s taken you to read this far). But the unfunded liabilities (commitments to pay for things) total more than $100 trillion…$100,000,000,000,000.

And since everyone in the country earns (added together) in the neighborhood of just (just!) $60 trillion, well…uh, I’m pretty sure that we’re in deep financial doo-doo.

In 1790, there was debt as well. The U.S. government had borrowed heavily from the French and Dutch to finance the Revolution, to the tune of roughly $12 million in principle and interest (or about a minute’s worth of modern-day debt). But in addition, the government had borrowed more than $40 million from its own citizens, handing out I.O.U.s like chucking candy from a float on the 4th of July.

And now that an “official” government was getting under way, one of first things on the docket was establishing good credit. That meant paying off the debt. Treasury Secretary Alexander Hamilton felt strongly (as did most of his contemporaries) that debt was bad for people, and worse for governments. He would write that debt “is perhaps the NATURAL DISEASE of all Governments. And it is not easy to conceive anything more likely than this to lead to great and convulsive revolutions of Empire.”

And so he set to work, building a plan to erase the debt and pay back the lenders, which would improve the new nation’s standing, both with its citizens and with the world. That plan, called the Report on Public Credit, was 51 pages in length (the first page is illegibly shown above), and was read aloud to Congress on January 14, 1790. It contained (essentially) three parts.

First, there was immediate repayment of the foreign debt. Hamilton argued that those countries had given us hard currency in a time of great distress. National honor was at stake. Second, the United States would repay the $40 million in domestic debt to those that held I.O.U.’s from the government. They would be paid at full face value with accrued interest. And finally, since all of the states had built up some debt financing their own portions of the Revolution, the government would assume those debts as well. They totalled about $25 million. The grand total of debt to be paid was something less than $80 million (or what our government has run up while you’ve been reading this). All members Congress agreed with the first point…repaying foreign debt was paramount.

But the battle began in earnest over the second and third points.

Point Two, paying off the domestic debt was important, but who would get the money? Many of those owed money by the government were soldiers, who had left the army at fight’s end with nothing but a promise of compensation. And promises don’t pay the bills. So many of them had sold their I.O.U.’s (for 15 cents on the dollar or less) to speculators, who hoped to make a profit should the government decide to make good. Now that it was, those folks stood to make a killing, while those who originally owned the debt got nothing. Detractors of Hamilton’s plan said it wasn’t fair. Speculators had taken advantage of others and now stood to make a fortune. Something should be given to both groups.

Hamilton (and those that sided with him) argued that, while many people had sold their debt in time of crisis, they too had engaged in speculation…speculation that the government was not going to make good. How was that really any different? And to go back and try to find all these people was a logistical impossibility. But what’s more, it amounted to the government giving people money that were no longer owed, which many considered discrimination.

As for Point Three (the assumption of state debt), this one really got some states steamed. Yes, every state had debt after the Revolution. Massachusetts and South Carolina, in particular, had very large debts. But some (including powerful Virginia) had already paid off its debts through taxing its citizens. Others still had some debt, but had sound plans already in place for repayment. Now the federal government was going to assume all the debts and states like Virginia would be re-taxed. Once again, Hamilton argued that having one overarching “debt-paying” plan in place was far better (and far more efficient and ultimately less expensive) than individual state programs.

But there was more to it. Politically, the government was still in its infancy, and many still railed against it. There were questions as to its long-term survival. Placing the debt in the federal government’s hands meant that people’s allegiances shifted to the central government. If people wanted to get their money back, it was in their best interests to see that government survived at least long enough to do so. And since the plan included paying off 5% of the debt and interest each year, Hamilton’s motive was clearly not to make the central government an all-powerful entity to control the lives of its citizens. He was basically using a bit of debt to buy a little time for a brand-new system to get grounded.

The Report on Public Credit would create months of debate in Congress. James Madison, not present at the plan’s unveiling (he was late returning due to a bout of dysentery), would strongly disagree with Hamilton’s proposals. In our musings together, we’ve often alluded to the friendship-turned-rivalry of these two great men. That split began right here.

2 Responses

Great job on this post. You managed to capture a lot of very interesting things in a very few words. Your explanation of the situation vis a vis speculators was amazingly concise and perceptive. At a time when there wasn’t much in the way of hard specie, much commerce was conducted through account books, barter, iou’s and land certificates. Washington himself caught the speculation fever and wrote to his younger brother Charles to see if there was any opportunity to buy these certificates from “former soldiers who may be in want of cash.”

But as you point out, those who sold the certificates were engaged in their own form of speculation. They were, in fact, betting that these promises from the government weren’t worth anything and would never be redeemable.

Looking at it another way, the “evil” speculators who bought certificates were actually betting on the future of the country, while those that sold were not.

However, this is obviously an oversimplification. Times were tough and things were dire. Furthermore, there had been some shenanigans in the congress under the Articles of Confederation. A venture called the Ohio Company was cooked up by a group of former Generals and pitched to Congress. They sold 1.5 million acres of land to the company for about 0.66/acre. In another deal (with the Scioto Company) they sold 1.7 million acres for $1M with an option to buy 5 million more. These deals, while notoriously bad were at least a means for the government to get some money. The subsequent actions of these companies didn’t do much to bolster the reputation of speculators. They sold the land they had, land they didn’t own, and in some cases, even land that didn’t exist!

And so, just as the assumption of State debts was a big deal, so was the curing of all of these obligations, regardless of who owned them. The economy was in shambles and people needed stability. Because of the lack of a unified system of trade, in particular with regard to import tariffs, and the poor credit of the fledgling country, the US went into a deep depression due to the steep decline in foreign trade.

This was the backdrop against which these political battles were fought. Just as Washington was the indispensable man for the Revolution (and for the formation of the country), it is Hamilton who deserves the credit for setting the country’s finances right.

Thanks for your kind words and for adding additional information. I very much appreciate the “flesh” you can add to my “skeletons”. I try to keep things simple at Today’s History Lesson (mostly for my own sake), but this just required a lot of words, because the context of Hamilton’s report and the reaction to it is so rich and complex. It’s the longest piece I’ve done in 3 years of typing and, as you point, there’s still a LOT that could be said.